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Higher Prices Lead To Higher Profits
I know at first glance this sounds obvious, but it may be worth
it for you to think about your prices. At least just for a
moment.
How did you decide on your current pricing? Did you conduct
market research to understand what prospects would pay? Or did
you compare yourself to your competitors and base your price on
that? Or was it a crapshoot, and random shot in the dark?
These are the ways most people do it, and they are all wrong.
Because the price you set for your products and services is more
important than you think.
The following few paragraphs are a bit number heavy, but stay
with me because this will be really valuable for you to
understand.
Let's say you sell a high margin product - information products
and software are two good examples. Your price is $60, and your
costs are $10 - that means your gross margin (selling price -
your costs) is $50 each time you sell one unit. Let's say
further that your overhead is $5,000 per month. If you sell 100
units you'll break even, right?
Now you want to sell more, and decide you can take some business
from a competitor by lowering your price - temporarily. You
lower it to $40 - a 33% price cut, and not uncommon.
Your costs remain $10 and your overhead is still $5,000, only
now your gross margin is $30 - 60% of what it was before. And
how many units do you need to break even now? 166! That's 66%
more unit sales required to make up for the 33% price cut!
But what if you're feeling very aggressive and you cut your
price in half (also not unheard of) to $30. Now you have to sell
250 units - just to break even! That's 2-1/2 times as many as
before. How easy do you think that's going to be?
Let's use a different example - something that has real
manufacturing costs. This time, your product sells for $100, and
your cost of goods are $50 per unit, for a gross profit of $50.
Same $5000 overhead, same number of units to break even. Now
imagine you cut your price 20%, to $80, leaving you with $30 of
gross margin. You need to sell 66% more units. Ouch!
What if you cut the price to $70. This 30% price cut means you
have to sell 2-1/2 times more units - just to stay even.
Let's go further...
Competition is really heating up and you think that matching
them cut for cut is the way to go. The price for this amazing
widget of yours is now a bargain basement $60.
(Shucks, that's only 40% off your original price. Salespeople
and business owners do this every day.)
How many units do you need to break even? 500.
Five hundred? That's five times your original number.
Do you really think you can sell five times what you did before
- at least without significantly raising your overhead and your
variable cost of sale?
How many times have you done just this in response to
competitive pressures?
How many times have you cut prices because you thought it would
help you sell more?
:(:(:(
What we've just done is a simplified version of what's called
margin analysis, and I hope it gives you a glimmer of what can
happen when you mis-price.
For the most part, your price cuts don't automatically enable
you to sell 66% more than you did before, and generally - at
least not in this universe - you don't sell 250% more, and
never, ever do you sell 500% more with this kind of price
cutting.
But there is some good news - and it's very good.
Let's look at what happens when you raise your prices.
Remember your high-margin product. It sells for $60 and costs
$10 to make.
Through good product positioning and excellent marketing you
raise the price to $70. That's only a 15% increase. Now you only
have to sell 83 units to break even, and if you sell the same
100 units, your profits go from $0 to $1000. Nice increase...
And that "hard" product - the one with $50 of costs? Raise the
price tag 20% to $120, your margins increase to $70, and now
your breakeven drops 71, and you make $2000 if you sell the same
number of them.
See how this works?
:):):)
You can do this same analysis in a bit more sophisticated way,
considering your marketing costs, sales or affiliate
commissions, travel expenses if you have them, and so on. You
can see the actual pricing effect varies quite a bit depending
on these details.
If you have a high-leverage, pay-only-for-results affiliate
model, a very high gross margin and almost no fixed overhead,
you have a lot of price flexibility. You can cut the price 25%
and only need to sell 15% more! That's not too bad at all.
But only in that type of model. If you have a office, some
staff, and a physical product - in other words, fixed overhead -
lower prices can kill you - and you won't even see it coming.
And higher prices?
They can make you rich.
By now you are starting to see the tragic effects of mis-pricing
on the downside, and the marvelously enriching possibilities of
raising your prices.
This only works, of course, when you can also increase your
value proposition...
Stay tuned for part 2.
Follow this link at the bottom of the page to get a copy of an
excel spreadsheet to play with. Get the spreadsheet, plug in
your own numbers. It will really blow your mind. Also, feel free
to pass this article or the spreadsheet on to your friends and
associates. They will definitely appreciate
it.(http://www.paullemberg.com/higher-part1.html)
(c) Copyright Paul Lemberg. All rights reserved
About the author:
Paul Lemberg is the president of Quantum Growth Coaching, the
world's only fully systemized business coaching program
guaranteed to help entrepreneurs rapidly create More Profits and
More Life™. http://www.fastergrowthnow.com
Written by: Paul Lemberg
70
Tips To Get Your Home Ready for a Quicker Sale at
a Higher Profit. Click
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